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Interest rate commentary for 18 Apr – 21 Apr 2017

Another week of politics and another week of markets trying to make sense of what it all means. The U.K. will hold a general election in June to demonstrate the U.K.’s commitment, or otherwise, to Brexit. The French have begun their two stage process of electing a president who may or may not be in favour of a French exit from the EU (“le Frexit”). While the candidate in favour of le Frexit is viewed as a slim chance, it is worth remembering outside chances can come in on occasion (a la Trump). Imagine what that result would do for bond yields…

Talking about bond yields, they generally moved higher in the major bond markets around the world, including the market here in Australia, although the moves were small and bordering on insignificant. Yields are back at pre-Trumpian levels in most markets but if the U.S. Fed’s Beige Book is correct then the U.S. economy is growing, wages increases are more widespread and therefore supportive of higher yields.

The Trump administration is also playing up the future effects of their tax plan. “It will be sweeping, it will be significant and it will create a lot of economic growth”. The proof of the pudding is in the eating…

CHART OF THE WEEK

Spot the change in Government from this graph…looks like business as usual as far as the debt train (or can being kicked down the road) is concerned..

chart of the weekhome
Close △Week Week
High
Week
Low
Cash Rate%   1.50
90day Bank Bill% 1.75 -0.02 1.77 1.75
Aust 3y Bond%* 1.82  0.04 1.83 1.75
Aust 10y Bond%* 2.57  0.06 2.59 2.46
Aust 20y Bond%* 3.16  0.08 3.16 3.06
US 2y Bond%   1.19 -0.02  1.21  1.16
US 10y Bond% 2.25  0.02 2.25 2.17
US 30y Bond% 2.90  0.01 2.91 2.84
iTraxx 85.5 -1.55 90.1 85.5
$1AUD/US¢ 75.45 -0.24 76.11 74.92
* Implied yields from June 2017 futures

 

Australian cash markets don’t expect a rate rise until well in 2018 and by the sounds of it, neither does the RBA. The RBA knows it has a problem with house prices in the two most populous housing markets in the country. However, it does not want to raise rates because of the state of the labour market and the amount of debt households are carrying, even if rates are at or are close to all-time lows.

The rate changing committees at approved deposited-taking institutions must have all had the same idea because almost none of them did anything this week. The ones which did will not please term deposit investors. Check our tables for the best term deposit rates available.

Median trading margins of ASX-listed notes fell while those in the ASX-listed hybrids sector were slightly higher. One reason for divergence from each other and the bond market in general, is the prevalence of listed notes fast approaching their call dates in 2017. As always, it is worth a look in these markets to check for anything which seems out of place, either on the high or low side.

The corporate bond market was popular with a relatively good mix of local non-bank issuers and foreign banks issuing bonds. Spreads and other measures of risk did not alter to any great degree as corporate yields largely followed Commonwealth Government bond yields higher.

The semi-government bond market was quiet and there were no primary market transactions. However, for any given tenor, yields are higher than comparable ACGB yields so investors may wish to check out what is available.

We hope you enjoy reading this week’s YieldReport.

March 2017 monthly interest rate commentary

Early in the month local factors such as Q4 GDP figures, were generally supportive of higher Australian yields. European politics were an influence on the global stage but the safe-haven trade in German bunds and US Treasury bonds soon gave way in the face of relatively-high German inflation figures and a raft of US Fed officials, including Janet Yellen, who warmed the market up to the growing likelihood of US official rate rises. There had been other US Fed officials who had said pretty much the same thing in previous weeks but the market finally cottoned-on to the sheer number and breadth of officials saying the same thing; expect rate rises this year if “employment and inflation are continuing to evolve in line with our expectations…” as Janet Yellen put it.…Click here to read more

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